Wal-Mart de Mexico: Accent on Growth
Wal-Mart may be the 800-pound gorilla of retailing, but it doesn't get much respect these days. Politicians and unions bash the company for its labor practices and burgeoning imports from China. The Arkansas gorilla recently sold its operations in Germany and South Korea and beat an ignominious retreat from those countries. Wal-Mart hasn't fared much better on Wall Street. Warren Buffett and the smart money say WMT is seriously undervalued, but the stock has gone nowhere for six years.
South of the border it's a different story. Wal-Mart de Mexico SA, Wal-Mart's separately listed Mexican subsidiary, is on a roll. Wal-Mex stock, which trades as an American Depositary Receipt under the symbol WMMVY, has surged 39% in a year, and Rick Helm, manager of Cohen Steers Dividend Value fund, thinks the company will continue to steam ahead.
Helm says Wal-Mex, the dominant retailer in the country, resembles the Wal-Mart of old in many ways. Growth prospects are outstanding, because of rising affluence in Mexico and a growing middle class. Wal-Mex operates 825 stores in 119 cities, but has identified 250 more towns in which it wants to break ground. As it did in the U.S. decades ago, Wal-Mart, which owns nearly two-thirds of Wal-Mex, brings efficiency to Mexico's distribution, logistics and retailing. "The stores have great credibility with Mexico's growing middle class," says Helm, who is also enthusiastic about the likelihood that Wal-Mex will receive a banking license this year from Mexican authorities -- sooner than its parent is expected to receive one in the U.S.
In the first half of 2006, Wal-Mex's revenues rose 19%, and earnings shot up 37%. The firm's net profit margin (net profits divided by sales) of 5.8% is nearly twice that of its parent. Wal-Mex closed Friday at $32.30, or 26 times Helm's 2006 earnings estimate of $1.26 per share. He expects per-share earnings to compound by 19% annually over the next five years. The stock yields 1.1%, and Helm expects the company to boost the dividend dramatically over the next few years.